Apple faces opportunity – and risks – with iPhone expansion

Expansion of the iPhone product line to both lower price points and larger screen sizes has become a running conversation around shares of Apple Inc. recently, as investors try to asses the health of what is the company\’s most important — and profitable — business lines.

Reuters

The iPhone 5, left, and 4S.

A pair of brokers picked up that conversation on Tuesday with a mix of data. Bank of America/Merrill Lynch issued a lengthy report on why Apple
should launch a lower-cost iPhone, given where the growth in the smartphone market is likely to take place over the next couple of years. Jefferies & Co. said the company is likely to launch such a device this summer — but added that a much-rumored, larger-screen iPhone is unlikely until the next year, due to technical challenges.

Apple shares edged up in morning trades on Wednesday. The iPhone accounted for about 53% of Apple\’s total reported revenue for the 2012 calendar year, and analysts believe it contributes to a larger percentage of the company\’s earnings.

On a low-priced iPhone for emerging markets and budget-conscious consumers, Scott Craig of BofA/Merrill believes Apple could expand its total addressable market by about 55% with such a device \”and nicely complement Apple’s ongoing international expansion.\”

He also believes the company could maintain a 35% gross margin on such a device that is built with a final price tag of $250-$300 in mind. The current iPhone 5 sells for more than $600, once the subsidies paid by carriers to Apple are factored in.

Peter Misek of Jefferies & Co. believes Apple is planning to launch such a device this summer, along with what is currently thought of as the iPhone 5s, which would feature the same design as the iPhone 5 with an improved chip. But his note also added his view — based on supply chain research — that an iPhone with a larger 4.8-inch screen is not likely until mid-2014, due to manufacturing issues.

\”Apple tried to accelerate the launch, but scaling the in-cell screens from 4\” to 4.8\” created substantial yield issues,\” Msek wrote of what he called the iPhone 6.

Misek added that such an iPhone could also pressure margins for Apple, given the more expensive components and display. This may be offset somewhat by improved profits from an iPhone 5S, which is expected to feature the same form factor as the 5. But his note added that \”we remain concerned with slowing demand and margin pressure,\” and he maintained his hold rating on the stock.

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